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Day-Trading is a Total Scam. Don’t Fall For the Pitch

by Darwin on April 20, 2011

I'll Take That For Ya!

I constantly hear radio spots for getting rich day-trading. The claims on the commercials are so outrageous, I can’t even believe the FTC allows it. If you listen to satellite radio at all, you’ll know exactly which ads I’m referring to; they play a repeating cycle virtually every commercial break. They often start off with something like the following:

The Claim: “I Quit My Day Job. I start work at 9AM and I’m liquid by lunchtime each day.”

The Reality: About the only thing I’d believe throughout the whole commercial is that most of the trading is done in the first and last hour of trading. This has been shown statistically. As far as quitting a day job to do this? Unless your day job was the unemployment line, I highly doubt there are more than a handful of examples where successful US workers are doing better now day-trading than they were when they were gainfully employed. If fact, I’d love to see the numbers for people who went through their program and what their annualized gains are (after taxes). You’ll never see such a report.

The Claim: “I made $3 Million trading in the worst bear market in history. Bull, Bear, I don’t care!”

The Reality: First of all, if this is even true, then, he made $3Million on what base? Was he trading on margin with a $100 Million base and made $3 Million? That’s a 3% return over a period of years. Was it on margin? Did he get lucky with a ton of out of the money options? Did he just own gold or bonds and no stocks during the crash? So, he got lucky and timed the market once and that’s the claim to fame? What’s to say this will work in the future? And…if he’s this good, why the heck would he be selling himself out and sharing his secret??? He wouldn’t be wasting his time!

The Claim: “How would you like to know what the market is going to do 80% of the time? We know and so can you with our trading system”

The Reality: What does this really mean, 80% of the time? How is that measured? What are the numerator and denominator in this equation and most importantly, what are the ACTUAL ANNUALIZED RETURNS using this system during various time periods? That’s what I’d want to know, and they’ve been conveniently omitted from the commercial.

The Ultimate Reality – Always Question This…

Here’s something I always ask myself and you should too when it comes to purported investing strategies for sale. If the strategy were so successful, why would anyone “sell it”. They would be focusing all their efforts on executing this strategy, borrowing more money, managing money professionally, or making a living off it in some way other than selling other people a system. Think about it. Some of the top hedge fund managers make tens of millions of dollars per year for beating their benchmark. Are they wasting time peddling books, CDs, and newsletters? No. The people that are selling you the dream aren’t making money themselves. If they were, they’d be focused on making MORE money from their investments, not sharing their “secrets” with a gullible public.

Look, there are some successful day-traders out there. Most of them work for the likes of Goldman Sachs and make an order of magnitude more than the rest of us by using their proprietary information (front-running anyone?) and platforms (see how Goldman turned a profit EVERY DAY from trading for a full quarter). Read that again. That’s like batting 1000. Even in down markets, sideways markets, Goldman profited EVERY SINGLE DAY. You think you can compete with that? Aside from Wall street firms, they’re few and far between.

I Know a Day-Trader

One of my old college buddies was a day-trader for about 10 years out of college. It’s what he did for a living – some technical analysis, some momentum trading, some fundamental. He didn’t work for a large firm, he worked for himself. He was able to eek out a living, but he didn’t get rich. He eventually started shifting away from it and earning income other ways like through insurance and other means. He said the stress was killing him and that he was basically “gambling for a living”. It didn’t seem to the the most fulfilling, or even profitable venture. I’m sure a daytrader will come across this article and dispel some of these opinions, but seriously, if you’re one of them – do you think a typical American hearing this commercial should quit their job and try daytrading for a living? You can’t be serious.

If you think you have what it takes, you’ve got to ask yourself a few questions:

What makes you think you’re smarter than the thousands of other very smart people out there?

What makes you think you can deliver better results than the best and the brightest out of MIT math and engineering programs now working on Wall Street?

Do you really think you’re going to have a better career doing this than a more conventional career?

What is the endgame? Are you going to do this for the rest of your life?

What are you going to do when you blow through you life savings chasing this sham?

There’s a difference between a retail investor like me, who wants to own a piece of Apple or Baidu and a day trader. I’m an investor and I hold for months or years. A daytrader is trying to profit purely from little momentum shifts, capturing a few pennies here a few there, often with leverage to make it worthwhile. The transaction costs and taxes will often chew up what little edge you think you can eek out. And then, there’s the downside risk of loss (even when investing in gold). It’s a net losing game and if you think you can “win” with all these headwinds, you may want to realistically assess why you’re so overconfident.